Market Segmentation – Why is it so Difficult?

In our Grassroots Strategy workshops with clients, the highlight of the week is often market segmentation.  Done well, it is one of the most important changes in the way you think about your business and customers – the customers you choose to serve and how you serve them impacts both the revenue and the expense sides of your income statement.  But too often, teams struggle to do it well. 

Like ‘strategy,’ ‘segmentation’ is one of those words that almost every company uses, but can mean very different things to different companies.  Some companies refer to business segments, others may mean product lines, still others label customer end-use industry or vertical market as a ‘segment.’  Many companies have an account segmentation of “key” customers and “transactional” customers.  We even remember one client who told us sincerely that they had two segments: smart customers who bought from them and stupid customer who didn’t!  Some of these classifications may be helpful in tracking your business.  But, in our experience, to get the full power from using segmentation– the only thing that works is segmentation grounded in customer needs.

A good needs-based segmentation allows you to tailor your offering to specific segment needs including:

  • Development of specific products
  • Providing different levels of support
  • Allocating different levels of sales resources
  • Using different channels and pricing differently based on the specific value created for that segment.

Tailoring your offering to target segments and pricing to value improves the revenue line through both greater volume and higher margin. Focusing resources on segments where you are most advantaged impacts the expense line by reducing unproductive sales activity and by avoiding over-featuring an offering for segments where these features are not valued.

The basic concept is fairly simple, almost obvious: “different customers have different needs, so let’s put them into some logical groupings and develop different approaches for each group.” And yet, many struggle to make this work in practice. So, what is it about needs-based segmentation that makes it so difficult?

We have identified five things that get in the way of effective B2B market segmentation:

  1. 1. Lack of Strategic Marketing Capability – Good segmentation requires a strategic marketing capability.  Too many B2B companies are sales-centric, with little or no marketing beyond marketing communications.  Having a great salesforce is important, but it is not enough.  Left to their own, salespeople tend to believe “every customer is a good customer” and “every customer is different.” While not completely untrue, this way of thinking can inhibit getting to a workable segmentation. Different customers have different cost of sales, value our offering differently and have differing probability of choosing us over our competition. This results in different customers having differing profitability. While technically, “every customer is different”, customizing everything for every customer is rarely the right approach. Grouping customers with similar needs is an extremely powerful tool to drive your business and focus your resources.
  1. 2. Desire to Quantify – Too many companies, especially those that are technologically strong, instinctively believe that you don’t know something unless you know it exactly.  This causes them to tend to focus on segmenting based on data that are readily available and to reach for statistical techniques that will produce precise answers, but these segmentations are often not helpful.
    1. For example, they may require detailed data that only exists for current customers, meaning that we have no way of putting non-customers into the segmentation and thereby finding new ways to engage them.  As if walking you into this trap, several analytics firms are happy to tell their clients that this statistical approach is the only way to do segmentation.
  2. A segmentation framework based on strategically actionable needs (even if it resists precise quantification) is much more powerful than a precisely quantified segmentation that does no more than describe the existing market using available data.
  1. 3. Incorrectly Applying Consumer Segmentation Techniques – Consumer segmentation often uses psychographics to gain insight into how end-customers think about the product or problem and how it fits into their lifestyle.  This can be quite important in consumer messaging, for example in being able to separate the hard core DIY’er who enjoys tackling home remodeling projects from their neighbor who might reluctantly undertake an occasional home repair project to save a few dollars. They may buy the same product, but their motivation and response to retail promotions would be very different.  This emphasis on ‘personas’ is easily misapplied in a B2B context.  And, if the end-customer being studied is not the primary decision-maker, it may be downright misleading. 
    1. As an example, one of our clients sold residential entry doors.  They did a detailed study of consumer attitudes about their front door and the perceived value it brought to their home.  The work was interesting, but extremely difficult to link to the buying process, where the vast majority of doors are purchased as part of a larger project (often a new construction house) and the customer’s choice is bounded by what the contractor offers – which in the extreme may be just a choice of paint color.
  2. While individual end-consumers do make some buying decisions, the ultimate buyer in the B2B world is the purchasing business entity. Segmentation is generally most productive when based on the functional and economic needs of the business entity, not the emotional/psychographic attitudes of the individual end-consumers.  Linking segmentation to the reality of the purchase decision process is essential.
  1. 4. Lack of Deep Customer Insight – Many B2B companies are short-term oriented and sometimes overly focused on the channel customer (the one who can take an extra truckload to help them make the quarter) rather than customers further down the value chain.  Too often, these companies lack the insight required to factor end-customer needs into their segmentation, at the extreme, if they sell through a distributor, formulator or converter, they may not even know who the end-customer is.  Building an objective view further into the value chain is almost always worthwhile (who is the end-customer and what are the problems they are trying to solve?).  Some combination of systematic observation and targeted VOC can yield a huge payback, and is a prerequisite to developing a workable segmentation.
  1. 5. Not willing to Face the Implications – Some of our clients have a reasonable segmentation, but it exists only as a PowerPoint chart somewhere in the marketing department – there is no process to actually change what they offer or how they price or serve a customer based on the segment into which they fall.  Said differently, if the only answer that sales will accept is “every customer gets two sales calls a year and buys from the same price list,” then segmentation is a waste of time.  Impactful segmentation has to drive organization-wide change in which customers you serve and how you interact with them through sales, distribution, technical support and customer service – it can’t just be a marketing exercise.

We have found that segmentation is always iterative and sometimes messy. Segmentation is part art and part science – there is no process diagram that always produces the right answer on a fixed timetable.  In fact, it is unlikely that there is one ‘right answer’ – you can usually tell that one segmentation is more helpful than another, but that doesn’t guarantee that there might not be a better one waiting to be discovered.   For that reason, we like to leave the working sessions on segmentation open-ended, and on occasion they have gone well into the night. 

Segmentation is hard work but extremely rewarding when you get it right. In an upcoming blogpost, “Market Segmentation – How to get it Right?”, we will describe some of the principles and techniques we use to avoid the mistakes above and unleash the power of an effective needs-based segmentation.

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